Adjusting Accounts and Financial Statements

Chapter 03 - Adjusting Accounts and Preparing Financial Statements
Chapter 3
Adjusting Accounts and Preparing
Financial Statements
QUESTIONS
1.
The cash basis of accounting reports revenues when cash is received while the
accrual basis reports revenues when they are earned. The cash basis reports
expenses when cash is paid while the accrual basis reports expenses when they are
incurred and matched with revenues they generated.
2.
The accrual basis of accounting generally provides a better indication of company

performance and financial condition than does the cash basis. Also, the accrual
basis increases the comparability of financial statements from one period to the
next. Thus, business decision makers generally prefer the accrual basis.
3.
Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.
4.
A prepaid expense is an item paid for in advance of receiving its benefits. As such, it
is reported as an asset on the balance sheet.
5.
Long-term tangible plant assets such as equipment, buildings, and machinery lead
to adjustments for depreciation. Generally, land is the only long-term tangible plant
asset that does not require depreciation.
6.
The Accumulated Depreciation contra asset account is used for depreciation. It

provides financial statement users with additional information about the relative age
of the assets. Without the contra account information, the reader would not be able
to tell whether the assets are new or in need of replacement.
7.
Unearned revenue refers to cash received in advance of providing products and

services. Another name for unearned revenue is deferred revenue. It is reported as
a liability on the balance sheet.
8.
Accrued revenue is revenue that is earned but is not yet received in cash (and/or
other assets) and the customer has not been billed prior to the end of the period.
Therefore, end-of-period adjustments are made to record accrued revenue.
Examples are interest income that has been earned but not collected and revenues
from services performed that are neither collected nor billed.
9.A If prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.
3-1
10.
For Research In Motion, all of the accounts under the category of Property and
Equipment (except for Land), require adjusting entries. The expense related to the
Depreciation Expense account would be understated on the income statement if
Research In Motion fails to adjust these asset accounts. If the adjusting entries are
not made, net income would be overstated. Note: Students might also correctly
identify accounts receivable (for bad debts), Intangible assets (for amortization),
Inventories (for shrinkage), and Short- and Long-term investments (for fair value) as
needing adjustment.
11.
Nokia reports 1,867 EUR (000,000s) for property, plant and equipment. For its
adjusting entry, it would need to record Depreciation Expense (debit) on the plant
and equipment and Accumulated Depreciation (credit) as the contra to the Property,
plant and equipment account.
12.
The accrued wages would be reported as part of the liability Other Accrued
Liabilities on Palms balance sheet.
3-2
QUICK STUDIES
Quick Study 3-1 (10 minutes)
a.
b.
c.
d.
e.
UR
PE
AE
AR
PE
Unearned revenue
Prepaid expenses (Depreciation)
Accrued expenses
Accrued revenue
Prepaid expenses

a. Insurance Expense .......................................................
Prepaid Insurance .................................................
1,800
1,800
To record 6-month insurance coverage expired.
b. Supplies Expense .........................................................

Supplies ..................................................................
2,700
2,700
To record supplies used during the year.

($1,000 + $3,000 [?] = $1,300)

a. Depreciation ExpenseEquipment ............................
Accumulated DepreciationEquipment .............
To record depreciation expense for the year.
($30,000 - $5,000) / 5 years = $5,000
3-3
5,000
5,000
b. No depreciation adjustments are made for land as it is expected to last

indefinitely.

a. Unearned Revenue........................................................
Legal Revenue .......................................................
15,000
15,000
To recognize legal revenue earned (20,000 x 3/4).
b. Unearned Subscription Revenue ................................

Subscription Revenue ...........................................
To recognize subscription revenue earned.
[100 x ($48 / 12 month) x 6 months]
3-4
2,400
2,400

Salaries Expense...........................................................
Salaries Payable ....................................................
400
To record salaries incurred but not yet paid.

[One student earns, $100 x 4 days, M-R]

Accounts Debited and Credited
Debit
Unearned Revenue
Credit Revenue Earned
Financial Statement
Balance Sheet
Income Statement
b.
Debit
Credit
Depreciation Expense
Accumulated Depreciation
Income Statement
Balance Sheet
c.
Debit
Credit
Wages Expense
Wages Payable
Income Statement
Balance Sheet
d.
Debit
Credit
Accounts Receivable
Revenue Earned
Balance Sheet
Income Statement
e.
Debit
Credit
Insurance Expense
Prepaid Insurance
Income Statement
Balance Sheet
a.
3-5
400

Cash Accounting:
Revenues (cash receipts) ......................................................
Expenses (cash payments: $22,500 - $2,250 + $3,750) ......
Net income .............................................................................
$33,000
24,000
$ 9,000
Accrual Accounting:
Revenues (earned) ................................................................
Expenses (incurred) ..............................................................
Net income ..............................................................................
$39,000
22,500
$16,500

The answer is c.
Explanation:
The debit balance in Prepaid Insurance was reduced by $400, implying a
$400 debit to Insurance Expense. The credit balance in Interest Payable
increased by $800, which implies an $800 debit to Interest Expense.
3-6

The answer is 2.
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by ..........
Accrued salaries error:
Understates expenses (and understates liabilities) by ....
Combination of errors:
Understates expenses by .....................................................
Overstates assets by .............................................................
Understates liabilities by ......................................................
$1,600
1,000
$2,600
$1,600
$1,000

Debit
Credit
1. Accrue salaries expense
2. Adjust the Unearned Services Revenue account

to recognize earned revenue
3. Record the earning of services revenue for which

cash will be received the following period
Adjusting entry

Profit margin = $37,925 / $390,000 = 9.7%
Interpretation: For each one dollar that Yang Company records as revenue, it
earns 9.7 cents in net income. Yangs 9.7% is markedly lower than the
competitors average profit margin of 15%. Thus, it must improve performance.
Quick Study 3-12A (5 minutes)
The answer is d.
a.
Under IFRS, financial statements normally present assets from least

liquid to most liquid.
b.
Under IFRS, financial statements normally present liabilities from

furthest from maturity to nearest to maturity.
3-7
EXERCISES
Exercise 3-1 (10 minutes)
1.
4.
2.
5.
3.
6.

a.
Unearned Fee Revenue ....................................................

Fee Revenue ..................................................................
10,000
10,000
To record earned portion of fee received in advance.
b. Wages Expense .................................................................

Wages Payable ..............................................................
9,000
9,000
To record wages accrued but not yet paid.
c.
Depreciation ExpenseEquipment ................................

Accumulated DepreciationEquipment.....................
19,127
19,127
d. Office Supplies Expense ..................................................

Office Supplies* .............................................................
5,242
5,242
To record office supplies used ($480 + $5,349 - $587).
e.
Insurance Expense ...........................................................

Prepaid Insurance** .......................................................
2,800
2,800
To record insurance coverage expired ($5,000 - $2,200).
f.
Interest Receivable .........................................................

Interest Revenue ........................................................
750
750
To record interest earned but not yet received.
g. Interest Expense .............................................................

Interest Payable...........................................................
3,500
3,500
To record interest incurred but not yet paid.

Notes:
Beg. Bal.
Purch.
End. Bal.
Office Supplies*
480
5,349
?
587
Prepaid Insurance**
Beg. Bal.
5,000
Used
?
End. Bal.
3-8
2,200
Used

a.
Depreciation ExpenseEquipment ................................

Accumulated DepreciationEquipment.....................
16,000
b. Insurance Expense ...........................................................

Prepaid Insurance* ........................................................
To record insurance coverage that expired
($7,000 - $1,040).
5,960
c.
Office Supplies Expense ..................................................

Office Supplies** ............................................................
To record office supplies used ($300 + $2,680 - $354).
2,626
d. Unearned Fee Revenue ....................................................

Fee Revenue ..................................................................
To record earned portion of fee received in advance
($10,000 x 1/2).
5,000
e.
Insurance Expense ...........................................................

Prepaid Insurance .........................................................
To record insurance coverage that expired.
4,600
Wages Expense .................................................................

Wages Payable ..............................................................
To record wages accrued but not yet paid.
4,000
f.
16,000
5,960
2,626
5,000
4,600
4,000
Notes:
Prepaid Insurance*
Bal. Bal.
7,000
?
End. Bal.
Used
1,040
3-9
Office Supplies**
Beg. Bal.
300
Purch.
2,680
?
End. Bal.
354
Used

a.
Apr. 30 Legal Fees Expense ...........................................
Legal Fees Payable .....................................
2,500
2,500
To record accrued legal fees.
May 12 Legal Fees Payable ............................................

Cash .............................................................
2,500
2,500
To pay accrued legal fees.
b.
Apr. 30 Interest Expense ................................................
Interest Payable ..........................................
To record accrued interest expense (9.6% x
$780,000 x 10/360) or ($6,240 x 10/30).
May 20 Interest Payable ..................................................
Interest Expense .................................................
Cash ............................................................
To record payment of accrued and current
interest expense (9.6% x $780,000 x 20/360).
c.
Apr. 30 Salaries Expense.................................................
Salaries Payable..........................................
To record accrued salaries
($9,000 x 2/5 week).
May 3
Salaries Payable .................................................

Salaries Expense ................................................
Cash .............................................................
To record payment of accrued and
current salaries ($9,000 x 3/5 week).
3-10
2,080
2,080
2,080
4,160
6,240
3,600
3,600
3,600
5,400
9,000

a.
b.
c.
d.
$ 1,650
$ 5,700
$10,080
$ 1,375
Proof:
(a)
Supplies available prior year-end ......... $ 300
(b)
(c)
(d)
$1,600
$ 1,360
$1,375
Supplies purchased in current year ........
2,100
5,400
10,080
6,000
Total supplies available ............................
2,400
7,000
11,440
7,375
Supplies available current year-end .....
(750)
(5,700)
(1,840)
Supplies expense for current year........... $1,650
$1,300
$ 9,600
(800)
$6,575

a. Adjusting entry:
2011
Dec. 31
Wages Expense..............................................................500
Wages Payable ......................................................
500
To record accrued wages for one day.

(5 workers x $100 x 1 day)
b. Payday entry:
2012
Jan. 4
Wages Expense..............................................................
1,500
Wages Payable ...............................................................500
Cash ........................................................................
To record accrued and current wages.
3-11
2,000

Dec. 31 Accounts Receivable ..............................................
Fees Earned.....................................................
To record earned but unbilled fees
(30% x $6,000).
1,800
31 Unearned Fees .........................................................

Fees Earned.....................................................
To record earned fees collected in
advance (70% x $6,000).
4,200
31 Depreciation ExpenseComputers ......................

Accumulated DepreciationComputers ......
To record depreciation on computers.
1,500
31 Depreciation ExpenseOffice Furniture ..............

Accumulated DepreciationOffice Furniture ...
To record depreciation on office furniture.
1,750
31 Salaries Expense .....................................................

Salaries Payable..............................................
To record accrued salaries.
2,450
31 Insurance Expense ..................................................

Prepaid Insurance ...........................................
To record expired prepaid insurance.
1,300
31 Office Supplies Expense .........................................

Office Supplies ................................................
To record use of office supplies.
480
31 Utilities Expense ......................................................

Utilities Payable ..............................................
To record incurred and unpaid utility costs.
70
3-12
1,800
4,200
1,500
1,750
2,450
1,300
480
70

Balance Sheet Insurance Asset using
Accrual
Cash
*
Basis
Basis
Dec. 31, 2009 ...................
$11,700
$0
Insurance Expense using

Accrual
Cash
**
Basis
Basis
2009 ..................................
$ 4,500
$16,200
Dec. 31, 2010 ...................

6,300
2010 ..................................
5,400
Dec. 31, 2011 ...................

900
2011 ..................................
5,400
Dec. 31, 2012 ...................

0
2012 ..................................
900
Total .................................
$16,200
$16,200
EXPLANATIONS:
*
Accrual asset balance equals months left in the policy x $450 per month (monthly
cost is computed as $450, from $16,200 divided by 36 months).
Months Left
Balance
12/31/2009 ....
26
$11,700
12/31/2010 ....
14
6,300
12/31/2011 ....
2
900
12/31/2012 ....
0
0
**
Accrual insurance expense equals months covered in the year x $450 per month.
Months Covered
Expense
2009..................................
10
$ 4,500
2010..................................
12
5,400
2011..................................
12
5,400
2012..................................
2
900
$16,200
3-13

a.
b.
c.
d.
e.
$5,390
$87,644
$93,385
$55,234
$70,158
/
/
/
/
/
$44,830
$398,954
$257,082
$1,458,999
$435,925
= 12.0%
= 22.0%
= 36.3%
= 3.8%
= 16.1%
Analysis and Interpretation: Company c has the highest profitability

according to the profit margin ratio. Company c earns 36.3 cents in net
income for each one dollar of net sales recorded.
Exercise 3-10A (25 minutes)
a.
Initial credit recorded in the Unearned Fees account:
July 1 Cash .......................................................................
2,000
Unearned Fees ..............................................
2,000
Received fees for work to be done.
Cash .......................................................................
Unearned Fees ..............................................
8,400
8,400
12
Unearned Fees ......................................................

Fees Earned...................................................
3-14
2,000
2,000

Completed work for customer.
18
Cash .......................................................................
Unearned Fees ..............................................
7,500
7,500
27
Unearned Fees ......................................................

Fees Earned...................................................
8,400
8,400
Completed work for customer.
31
No adjusting entries required.
b.
Initial credit recorded in the Fees Earned account:
July 1
Cash .......................................................................
Fees Earned...................................................
2,000
2,000
Cash .......................................................................
Fees Earned...................................................
8,400
8,400
12
No entry required.
18
Cash .......................................................................
Fees Earned...................................................
7,500
7,500
27
No entry required.
31
Fees Earned ..........................................................

Unearned Fees ..............................................
Adjusted to reflect unearned fees for unfinished job.
3-15
7,500
7,500
Exercise 3-10A - (Continued)

c. Under the first method (and using entries from a):
Unearned Fees = $2,000 + $8,400 - $2,000 + $7,500 - $8,400 = $7,500
Fees Earned = $2,000 + $8,400 = $10,400
Under the second method (and using entries from b):
Unearned Fees = $7,500

Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400
[Note: Both procedures yield identical results in the financial statements.]
Exercise 3-11A (30 minutes)

a.
Dec. 1 Supplies Expense ............................................
Cash ..........................................................
3,000
3,000
Purchased supplies.
b.
Dec. 2
Insurance Expense ..........................................

Cash ..........................................................
1,440
1,440
Paid insurance premiums.
c.
Dec. 15 Cash .................................................................. 12,000
Remodeling Fees Earned ........................
12,000
d.
Dec. 28 Cash ..................................................................
Remodeling Fees Earned ........................
3-16
3,600
3,600
e.
Dec. 31 Supplies .............................................................
Supplies Expense ....................................
1,920
1,920
Adjust expenses for unused supplies.
f.
Dec. 31 Prepaid Insurance ($1,440 - $240)..................
Insurance Expense ..................................
1,200
1,200
Adjust expenses for unexpired coverage.
g.
Dec. 31 Remodeling Fees Earned ..............................
Unearned Remodeling Fees ...................
Adjusted revenues for unfinished
projects ($12,000 + $3,600 - $6,300).
3-17
9,300
9,300

adidas AG
Balance Sheet
December 31, 2009
(Euros in millions)
Assets
Noncurrent assets
Intangible assets ...................................................
Tangible and other assets ....................................
Total noncurrent assets ........................................
Current assets
Other current assets .............................................
Inventories .............................................................
Receivables and financial assets ........................
Cash and cash equivalents ..................................
Total current assets ..............................................
Total assets ..............................................................
Equity
Total equity ..............................................................
Liabilities
Total noncurrent liabilities .....................................
Total current liabilities ............................................
Total liabilities .........................................................
Total equity and liabilities ......................................
3-18
2,980
1,410
4,390
486
1,471
1,753
775
4,485
8,875
3,776
2,263
2,836
5,099
8,875
PROBLEM SET A
Problem 3-1A (35 minutes)
Part 1
Adjustment (a)
Dec. 31 Office Supplies Expense .............................
Office Supplies ......................................
12,760
12,760
To record cost of supplies used

($3,000 + $12,400 - $2,640).
Adjustment (b)
31 Insurance Expense .......................................
Prepaid Insurance .................................
12,312
12,312
To record annual insurance coverage expense.

Policy
A
B
C
Total
Cost per Month

Months Active in 2011 2011 Cost
$660 ($15,840/24 mo.)
12
$ 7,920
363 ($13,068/36 mo.)
9
3,267
225 ($ 2,700 /12 mo.)
5
1,125
$12,312
Adjustment (c)
31 Salaries Expense (2 days x $2,100) ............
Salaries Payable....................................
4,200
4,200
To record accrued but unpaid wages.
Adjustment (d)
31 Depreciation ExpenseBuilding ................
Accumulated DepreciationBuilding
27,000
27,000
To record annual depreciation expense

[($855,000 -$45,000) / 30 years = $27,000].
Adjustment (e)
31 Rent Receivable ............................................
Rent Earned ...........................................
2,400
2,400
To record earned but unpaid Dec. rent.
Adjustment (f)
31 Unearned Rent ..............................................
Rent Earned ...........................................
To record the amount of rent earned for
November and December (2 x 2,175).
3-19
4,350
4,350
Problem 3-1A (Continued)

Part 2
Cash Payment for (c)
Jan. 6
Salaries Payable ...........................................

Salaries Expense* ........................................
Cash .......................................................
4,200
6,300
10,500

current salaries. *(3 days x $2,100)
15
Cash Payment for (e)

Cash ...............................................................
Rent Receivable ....................................
Rent Earned ...........................................
To record past due rent for two months.

1.
5.
9. F
2.
6.
10. D
3.
7.
11. A
4.
8.
12. D
3-20
4,800
2,400
2,400

Parts 1 and 2
Unadj. Bal.
Cash
26,000
Unadj. Bal.
Equipment
Unadj. Bal.
16,000
(c)
12,000
Adj. Bal.
28,000
Accounts Receivable
0
(f)
7,500
Adj. Bal.
7,500
Unadj. Bal.
Unadj. Bal.
Adj. Bal.
Teaching Supplies
10,000
(b)
2,600
Equipment
70,000
Accounts Payable
Unadj. Bal.
Salaries Payable
Unadj. Bal.
Unadj. Bal.
Adj. Bal.
Prepaid Insurance
15,000
(a)
12,000
(g)
Adj. Bal.
Unadj. Bal.
Adj. Bal.
0
400
400
3,000
Unearned Training Fees
Unadj. Bal.
Prepaid Rent
2,000
(h)
0
36,000
7,400
(e)
11,000
4,400
Adj. Bal.
6,600
2,000
T. Watson, Capital
Unadj. Bal.
Professional Library
30,000
Unadj. Bal.
T. Watson, Withdrawals
40,000
Unadj. Bal.
Unadj. Bal.
9,000
(d)
6,000
Adj. Bal.
15,000
3-21
63,600

Tuition Fees Earned
Unadj. Bal.
(f)
Adj. Bal.
Unadj. Bal.
102,000
7,500
109,500
(h)
Adj. Bal.
Training Fees Earned

Unadj. Bal.
(e)
Adj. Bal.
Rent Expense
22,000
2,000
24,000
Teaching Supplies Expense

0
(b)
7,400
Adj. Bal.
7,400
Unadj. Bal.
38,000
4,400
42,400
Unadj. Bal.
0
(d)
6,000
Adj. Bal.
6,000
Advertising Expense
Unadj. Bal.
7,000
Equipment
Unadj. Bal.
0
(c)
12,000
Adj. Bal.
12,000
Unadj. Bal.
Salaries Expense
Unadj. Bal.
48,000
(g)
400
Adj. Bal.
48,400
Insurance Expense
Unadj. Bal.
0
(a)
3,000
Adj. Bal.
3,000
3-22
Utilities Expense
5,600
Part 2
Dec. 31
Adjustment (a)
Insurance Expense ......................................................
3,000
Prepaid Insurance ..................................................
3,000
To record the insurance expired.
Adjustment (b)
31 Teaching Supplies Expense .......................................
7,400
Teaching Supplies .................................................
7,400
To record supplies used ($10,000-$2,600).
Adjustment (c)
31 Depreciation ExpenseEquipment ...........................
12,000
Accumulated DepreciationEquipment ....................
To record equipment depreciation.
Adjustment (d)
31 Depreciation ExpenseProfess. Library ..................
6,000
Accumul. DepreciationProfess. Library ................
12,000
6,000
To record professional library depreciation.
Adjustment (e)
31 Unearned Training Fees ..............................................
4,400
Training Fees Earned ............................................
4,400
To record training fees earned that were

collected in advance.
Adjustment (f)
31 Accounts Receivable ...................................................
7,500
Tuition Fees Earned...............................................
7,500
To record tuition earned ($3,000 x 2 1/2 months).
Adjustment (g)
31 Salaries Expense .........................................................400
Salaries Payable.....................................................
400
To record accrued salaries (2 days x $100 x 2).
Adjustment (h)
31 Rent Expense ...............................................................
2,000
Prepaid Rent ...........................................................
To record expiration of prepaid rent.
3-23
2,000

Part 3
Watson Technical Institute
Adjusted Trial Balance
December 31, 2011
Debit
$ 26,000
7,500
2,600
12,000
0
30,000
Cash ..........................................................................
Accounts receivable ................................................
Teaching supplies ...................................................
Prepaid insurance ....................................................
Prepaid rent ..............................................................
Professional library .................................................
Accumulated depreciationProfessional library ...
Equipment ................................................................
70,000
Accumulated depreciationEquipment ................
Accounts payable ....................................................
Salaries payable .......................................................
Unearned training fees ............................................
T. Watson, Capital ....................................................
T. Watson, Withdrawals ..........................................
40,000
Tuition fees earned ..................................................
Training fees earned ................................................
Depreciation expenseProfessional library ........
6,000
Depreciation expenseEquipment .......................
12,000
Salaries expense .....................................................
48,400
Insurance expense ..................................................
3,000
Rent expense............................................................
24,000
Teaching supplies expense ....................................
7,400
Advertising expense ................................................
7,000
Utilities expense.......................................................
5,600
Totals ........................................................................ $301,500
3-24
Credit
$ 15,000
28,000
36,000
400
6,600
63,600
109,500
42,400
_______
$301,500

Part 4
WATSON TECHNICAL INSTITUTE
Income Statement
For Year Ended December 31, 2011
Revenues
Tuition fees earned ............................................ $109,500
Training fees earned ..........................................
42,400
Total revenues ....................................................
Expenses
Depreciation expenseProfessional library ...
6,000
Depreciation expenseEquipment ..................
12,000
Salaries expense ................................................
48,400
Insurance expense .............................................
3,000
Rent expense ......................................................
24,000
Teaching supplies expense...............................
7,400
Advertising expense ..........................................
7,000
Utilities expense .................................................
5,600
Total expenses ...................................................
Net income ............................................................
$151,900
113,400
$ 38,500

Statement of Owners Equity
T. Watson, Capital, December 31, 2010 ..............
Plus: Net income ..................................................
Less: Owner withdrawals ....................................
T. Watson, Capital, December 31, 2011 ..............
3-25
$ 63,600
38,500
102,100
40,000
$ 62,100
Problem 3-3A (Concluded)

Balance Sheet
December 31, 2011
Assets
Cash .................................................................................
Accounts receivable ......................................................
Teaching supplies ..........................................................
Prepaid insurance ..........................................................
Professional library ........................................................ $30,000
Accumulated depreciationProfessional library ....... (15,000)
Equipment ....................................................................... 70,000
Accumulated depreciationEquipment ...................... (28,000)
Total assets .....................................................................
Liabilities
Accounts payable ...........................................................
Salaries payable .............................................................
Unearned training fees ..................................................
Total liabilities ................................................................
Equity
T. Watson, Capital ..........................................................
Total liabilities and equity .............................................
3-26
$ 26,000
7,500
2,600
12,000
15,000
42,000
$105,100
$ 36,000
400
6,600
43,000
62,100
$105,100
Problem 3-4A (45 minutes) Part 1

Account
Unadjusted
Trial Balance
Adjusted
Trial Balance
Adjustments
Cash............................................. $ 27,000
Accounts receivable...............
Office supplies..........................
Prepaid insurance...................
Office equipment.....................
12,000
18,000
7,320
92,000
(a)
10,460
(b)
(c)
15,000
2,440
$ 27,000
22,460
3,000
4,880
92,000
Accumulated depreciation
Office equipment ..............
$ 12,000
(d)
6,000
$ 18,000
Accounts payable...................
9,300
(e)
(f)
(g)
900
800
6,600
10,200
800
6,600
14,300
44,000
28,420
(a)
(h)
10,460
1,700
Interest payable........................
Salaries payable.......................
Unearned consulting fees....
16,000 (h)
44,000
28,420
Long-term notes payable .....

J. Winner, Capital.....................
J. Winner, Withdrawals..........
10,000
Consulting fees
earned .......................................
Depreciation expense
Office equipment...................
Salaries expense .....................
Interest expense.......................
10,000
156,000
71,000
1,400
Advertising expense..............
6,000
6,000
(g)
6,600
800
2,440
77,600
2,200
2,440
13,200
15,000
14,700
_______
$43,900 $290,480
$290,480
13,200
Office supplies expense........
(b)
13,800
_______ (e)
Totals........................................... $265,720 $265,720
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
168,160
(d)
(f)
(c)
Insurance expense .................

Rent expense............................
1,700
15,000
900
$43,900
Adjustment description:
Earned but uncollected revenues.
Cost of consumed office supplies.
Cost of expired insurance coverage.
Depreciation expense on office equipment.
Incurred but unpaid advertising expense.
Incurred but unpaid interest expense.
Incurred but unpaid salaries expense.
Earned revenues previously received in advance.
3-27
______
Problem 3-4A
Part 2
JJW COMPANY
Income Statement
For Year Ended July 31, 2011
Revenues
Consulting fees earned ................................
Expenses
Depreciation expenseOffice equipment ..
Salaries expense ..........................................
Interest expense ...........................................
Insurance expense .......................................
Rent expense ................................................
Office supplies expense ..............................
Advertising expense ....................................
Total expenses ..............................................
Net income .......................................................
3-28
$168,160
$ 6,000
77,600
2,200
2,440
13,200
15,000
14,700
131,140
$ 37,020
JJW COMPANY
For Year Ended July 31, 2011
J. Winner, Capital, July 31, 2010 ....................
Plus: Net income .............................................
Less: Owner withdrawals ...............................
J. Winner, Capital, July 31, 2011 ....................
$28,420
37,020
65,440
10,000
$55,440

Part 2 (concluded)
JJW COMPANY
Balance Sheet
July 31, 2011
Assets
Cash .............................................................................
Accounts receivable ..................................................
Office supplies ............................................................
Prepaid insurance ......................................................
Office equipment ........................................................ $92,000
Accumulated depreciationOffice equipment ....... (18,000)
Total assets .................................................................
$ 27,000
22,460
3,000
4,880
74,000
$131,340
Liabilities
Accounts payable .......................................................
Interest payable ..........................................................
Salaries payable .........................................................
Unearned consulting fees .........................................
Long-term notes payable ...........................................
Total liabilities ............................................................
$ 10,200
800
6,600
14,300
44,000
75,900
Equity
J. Winner, Capital .......................................................
Total liabilities and equity .........................................
55,440
$131,340
3-29

Part 1
CALLAHAY COMPANY
Income Statement
Revenues
Fees earned .............................................. $420,000
Interest earned .......................................... 16,000
Total revenues ..........................................
Expenses
Depreciation expenseAutomobiles ..... 18,000
Depreciation expenseEquipment ........ 10,000
Salaries expense ...................................... 180,000
Wages expense ........................................ 32,000
Interest expense ....................................... 24,000
Office supplies expense .......................... 26,000
Advertising expense ................................ 50,000
Repairs expenseAutomobiles ............. 16,800
Total expenses .........................................
Net income ..................................................
3-30
$436,000
356,800
$ 79,200
CALLAHAY COMPANY
Statement of Owner's Equity
J. Callahay, Capital, December 31, 2010 ..
Plus: Net income .......................................
Less: Withdrawals by owner ....................
J. Callahay, Capital, December 31, 2011 ..
$247,800
79,200
327,000
38,000
$289,000

Part 1 (concluded)
CALLAHAY COMPANY
Balance Sheet
December 31, 2011
Assets
Cash ........................................................................
Accounts receivable ..............................................
Interest receivable..................................................
Notes receivable (due in 90 days) ........................
Office supplies .......................................................
Automobiles ...........................................................
Accumulated depreciationAutomobiles ...........
Equipment...............................................................
Accumulated depreciationEquipment ..............
Land .........................................................................
Total assets ............................................................
$ 22,000
44,000
10,000
160,000
8,000
$160,000
(42,000)
130,000
(10,000)
118,000
120,000
70,000
$552,000
Liabilities
Accounts payable ..................................................
Interest payable ......................................................
Salaries payable .....................................................
Unearned fees ........................................................
Long-term notes payable ......................................
Total liabilities ........................................................
$ 88,000
12,000
11,000
22,000
130,000
263,000
Owners Equity
J. Callahay, Capital ................................................
289,000
3-31
Total liabilities and equity .....................................
$552,000
Part 2
Profit margin = $79,200 / $436,000 = 18.2%
Problem 3-6AA (40 minutes)
Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.
Nov. 1
Prepaid Advertising .......................................

Cash ..........................................................
1,500
1,500
Paid for future advertising.

Cash ..........................................................
2,160
2,160
Paid insurance for one year.
30 Cash ..................................................................
Unearned Service Fees ...........................
3,300
3,300
Received fees in advance.
Dec. 1 Prepaid Consulting Fees ...............................

Cash ..........................................................
2,700
2,700
Paid for future consulting.
15 Cash ..................................................................
7,650
7,650
31 Advertising Expense .......................................

Prepaid Advertising ................................
600
600
To adjust prepaid advertising ($1,500-$900).
31 Insurance Expense ..........................................

Prepaid Insurance ....................................
To adjust prepaid insurance
($2,160 x 2/12).
3-32
360
360

31...........................................Unearned Service Fees
Service Fees Earned ................................
2,100
To adjust unearned service fees

($3,300-$1,200).
31 Consulting Fees Expense ..............................

Prepaid Consulting Fees .........................
900
900
To adjust prepaid consulting fees

($2,700 x 1/3).
31 Unearned Service Fees ..................................

To adjust unearned service fees.
3-33
3,000
3,000
2,100
Problem 3-6AA (Continued)

Part 2
Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.
Nov.1
Advertising Expense .......................................

Cash ..........................................................
1,500
1,500
Insurance Expense ..........................................

Cash ..........................................................
2,160
2,160
30
Cash ..................................................................
3,300
3,300
Dec. 1
Consulting Fees Expense ...............................

Cash ..........................................................
2,700
2,700
Paid for future consulting.
15
Cash ..................................................................
7,650
7,650
31
Prepaid Advertising ........................................

Advertising Expense ...............................
900
900
To adjust for prepaid advertising.
31

Insurance Expense ..................................
1,800
1,800
To adjust for prepaid insurance.
31
Service Fees Earned .......................................

1,200
1,200
To adjust for unearned service fees.
31
Prepaid Consulting Fees ................................

Consulting Fees Expense .......................
1,800
1,800
To adjust for prepaid consulting fees.
31
Service Fees Earned .......................................

3-34
4,650
4,650
Problem 3-6AA (Concluded)

Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Advertising expense for two months .....................................
Prepaid advertising as of December 31 .................................
Insurance expense for two months ........................................
Prepaid insurance as of December 31 ...................................
Consulting fees expense (1/3 of total paid) ...........................
Prepaid consulting fees ...........................................................
Service fees earned for two months ($2,100 + $3,000) .........
Unearned service fees at 12/31 ($1,200 + $4,650) .................
$ 600
900
360
1,800
900
1,800
5,100
5,850
When prepaid expenses and unearned revenues are recorded in balance

sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.
3-35
PROBLEM SET B
Problem 3-1B (30 minutes)
Part 1
Adjustment (a)
Oct. 31 Office Supplies Expense .......................................
Office Supplies ................................................
3,450
3,450
To record cost of supplies used

($500 + $3,650 - $700).
Adjustment (b)
31 Insurance Expense .................................................
2,675
2,675
To record annual insurance coverage expense.

Policy
A
B
C
Total
Cost per Month

$125 ($3,000/24 mo.)
100 ($3,600/36 mo.)
55 ( $660 / 12 mo.)
Months Active
in 2011
12
9
5
2011
Expense
$1,500
900
275
$2,675
Adjustment (c)
31 Salaries Expense ....................................................
Salaries Payable..............................................
800
800
To record accrued but unpaid wages

(1 day x $800).
Adjustment (d)
31 Depreciation ExpenseBuilding ..........................
Accumulated DepreciationBuilding ..........
To record annual depreciation
[($155,000-$20,000) / 25 years = $5,400].
3-36
5,400
5,400
Problem 3-1B (Concluded)

Adjustment (e)
Oct. 31 Rent Receivable ......................................................
Rent Earned .....................................................
600
600
To record earned but unpaid Oct. rent.
Adjustment (f)
31 Unearned Rent ........................................................
Rent Earned .....................................................
1,050
1,050
To record rent earned for September

and October (2 x $525).
Part 2
Cash Payment for (c)
Nov. 7
Salaries Payable .....................................................

Salaries Expense* ..................................................
Cash .................................................................
800
3,200
4,000

current salaries. *(4 days x $800)
Cash Payment for (e)

15
Cash .........................................................................
Rent Receivable ..............................................
Rent Earned .....................................................
To record past due rent for two months.
3-37
1,200
600
600

1.
5.
9. F
2.
6.
10. I
3.
7.
11. A
4.
8.
12. B

Parts 1 and 2
Unadj. Bal.
Cash
50,000
Accounts Payable
Unadj. Bal.
Accounts Receivable
0
(f)
5,500
Adj. Bal.
5,500
Salaries Payable
Unadj. Bal.
Unadj. Bal.
Adj. Bal.
Unadj. Bal.
Adj. Bal.
Unadj. Bal.
Adj. Bal.
Teaching Supplies
60,000
(b)
2,500
Prepaid Insurance
18,000
(a)
11,600
Prepaid Rent
2,600
(h)
0
12,200
Unadj. Bal.
(g)
Adj. Bal.
0
540
540
Unearned Training Fees

57,500
(e)
Unadj. Bal.
27,600
Adj. Bal.
18,400
9,200
M. Alcorn, Capital
Unadj. Bal.
6,400
M. Alcorn, Withdrawals
20,000
Unadj. Bal.
2,600
10,000
Unadj. Bal.
Unadj. Bal.
1,500
(d)
2,000
3-38
68,500
Adj. Bal.
Unadj. Bal.
3,500
Equipment
30,000
Equipment
Unadj. Bal. 16,000
(c)
4,000
Adj. Bal.
20,000
3-39
Problem 3-3B (Continued)

Parts 1 and 2
Tuition Fees Earned
Unadj. Bal.
(f)
Adj. Bal.
105,000
5,500
110,500
Training Fees Earned

Unadj. Bal.
(e)
Adj. Bal.
62,000
9,200
71,200
Unadj. Bal.
0
(d)
2,000
Adj. Bal.
2,000
Equipment
Unadj. Bal.
0
(c)
4,000
Adj. Bal.
4,000
Unadj. Bal.
(g)
Adj. Bal.
Unadj. Bal.
(a)
Adj. Bal.
Unadj. Bal.
(h)
Adj. Bal.
Salaries Expense
43,200
540
43,740
Insurance Expense
0
6,400
6,400
Rent Expense
28,600
2,600
31,200
Teaching Supplies Expense

Unadj. Bal.
0
(b)
57,500
Adj. Bal.
57,500
3-40
Advertising Expense
18,000
Unadj. Bal.
Utilities Expense
Unadj. Bal.
12,400

Part 2
Adjustment (a)
Dec. 31 Insurance Expense ................................................
Prepaid Insurance ..........................................
6,400
6,400
To record the insurance expired.
Adjustment (b)
31 Teaching Supplies Expense ................................. 57,500
Teaching Supplies .........................................
57,500
To record the cost of supplies used

($60,000-$2,500).
31
Adjustment (c)
Depreciation ExpenseEquipment.....................
Accumulated DepreciationEquipment .....
4,000
4,000
To record equipment depreciation.
31
Adjustment (d)
Depreciation ExpenseProfessional Library ....
Professional Library .............................
2,000
2,000
To record professional library depreciation.
31
Adjustment (e)
Unearned Training Fees .......................................
Training Fees Earned ....................................
9,200
9,200
To record training fees earned that were

collected in advance.
31
Adjustment (f)
Accounts Receivable ............................................
Tuition Fees Earned.......................................
5,500
5,500
To record tuition earned ($2,200 x 2 1/2 mo).
31
Adjustment (g)
Salaries Expense ...................................................
Salaries Payable.............................................
540
540
To accrue salaries expense (3 days x $180).
31
Adjustment (h)
Rent Expense ........................................................
Prepaid Rent ...................................................
To record expiration of prepaid rent.
3-41
2,600
2,600

Part 3
ALCORN INSTITUTE
December 31, 2011
Debit
Cash ........................................................................................... $ 50,000
Accounts receivable ...............................................................
5,500
Teaching supplies ...................................................................
2,500
Prepaid insurance ...................................................................
11,600
Prepaid rent ..............................................................................
0
Professional library.................................................................
10,000
Accumulated depreciationProfessional library ............
Equipment ................................................................................
30,000
Accumulated depreciationEquipment ............................
Accounts payable ...................................................................
Salaries payable ......................................................................
Unearned training fees ...........................................................
M. Alcorn, Capital ....................................................................
M. Alcorn, Withdrawals ..........................................................
20,000
Tuition fees earned .................................................................
Training fees earned ...............................................................
Depreciation expenseProfessional library .....................
2,000
Depreciation expenseEquipment ....................................
4,000
Salaries expense .....................................................................
43,740
Insurance expense..................................................................
6,400
Rent expense ...........................................................................
31,200
Teaching supplies expense ..................................................
57,500
Advertising expense...............................................................
18,000
Utilities expense ......................................................................
12,400
Totals ......................................................................................... $304,840
3-42
Credit
$ 3,500
20,000
12,200
540
18,400
68,500
110,500
71,200
_______
$304,840

Part 4
ALCORN INSTITUTE
Income Statement
Revenues
Tuition fees earned ................................................... $110,500
Training fees earned .................................................
71,200
Total revenues ...........................................................
Expenses
Depreciation expenseProfessional library ..........
2,000
Depreciation expenseEquipment .........................
4,000
Salaries expense .......................................................
43,740
Insurance expense ....................................................
6,400
Rent expense .............................................................
31,200
Teaching supplies expense......................................
57,500
Advertising expense .................................................
18,000
Utilities expense ........................................................
12,400
Total expenses ..........................................................
Net income ...................................................................
$181,700
175,240
$ 6,460
ALCORN INSTITUTE
M. Alcorn, Capital, December 31, 2010 ..............
Plus: Net income ..................................................
M. Alcorn, Capital, December 31, 2011 ..............
3-43
$68,500
6,460
74,960
20,000
$54,960

ALCORN INSTITUTE
Balance Sheet
December 31, 2011
Assets
Cash ..............................................................................
Accounts receivable ...................................................
Teaching supplies .......................................................
Prepaid insurance .......................................................
Professional library ..................................................... $10,000
Accumulated depreciationProfessional library .......... (3,500)
Equipment .................................................................... 30,000
Accumulated depreciationEquipment ................... (20,000)
Total assets ..................................................................
Liabilities
Accounts payable ........................................................
Salaries payable ..........................................................
Unearned training fees ...............................................
Total liabilities .............................................................
Equity
M. Alcorn, Capital ........................................................
Total liabilities and equity ..........................................
3-44
$50,000
5,500
2,500
11,600
6,500
10,000
$86,100
$12,200
540
18,400
31,140
54,960
$86,100
Problem 3-4B (45 minutes) Part 1

Unadjusted
Trial Balance
Account
Cash ................................................$ 48,000

Accounts receivable .................. 70,000
Office supplies ............................. 30,000
Prepaid insurance....................... 13,200
Office equipment.........................150,000
Accumulated depreciation
Office equipment.............................
Accounts payable.......................
Interest payable............................
Salaries payable ..........................
Unearned consulting fees........
Long-term notes payable.........
D. Chen, Capital ...........................
D. Chen, Withdrawals ................ 10,000
Consulting fees earned............
(a)
6,660
(b)
(c)
$ 30,000
(d)
36,000
30,000 (h)
80,000
70,200
23,000
4,600
$ 48,000
76,660
7,000
8,600
150,000
10,000
$ 40,000
(e)
(f)
(g)
6,000
1,600
11,200
42,000
1,600
11,200
17,800
80,000
70,200
(a)
(h)
6,660
12,200
12,200
10,000
264,000
Depreciation expense
Office equipment......................
Salaries expense.........................115,600
Interest expense .......................... 6,400
Insurance expense....................
Rent expense ............................... 24,000
Office supplies expense ...........
Advertising expense.................. 43,000 _______
Totals...............................................
$510,200 $510,200
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Adjusted
Trial Balance
Adjustments
282,860
(d)
10,000
10,000
(g)
(f)
(c)
11,200
1,600
4,600
(b)
(e)
23,000
6 ,000
$75,260
126,800
8,000
4,600
24,000
23,000
______
49,000 _______
$75,260 $545,660 $545,660
Adjustment Descriptions:
Earned but uncollected revenues.
Cost of consumed office supplies.
Cost of expired insurance coverage.
Depreciation expense on office equipment.
Incurred but unpaid advertising expense.
Incurred but unpaid interest expense.
Incurred but unpaid salaries expense.
Earned revenues previously received in advance.
3-45
Problem 3-4B
Part 2
DAXU CONSULTING COMPANY
Income Statement
Revenues
Consulting fees earned .....................................
Expenses
Depreciation expenseOffice equipment ....... $ 10,000
Salaries expense ............................................... 126,800
Interest expense ................................................
8,000
Insurance expense ............................................
4,600
Rent expense ..................................................... 24,000
Office supplies expense ................................... 23,000
Advertising expense ......................................... 49,000
Total expenses ...................................................
Net income ............................................................
$282,860
245,400
$ 37,460

D. Chen, Capital, December 31, 2010 .................
Plus: Net income ..................................................
D. Chen, Capital, December 31, 2011 .................
3-46
$ 70,200
37,460
107,660
10,000
$ 97,660

Part 2 (concluded)
Balance Sheet
December 31, 2011
Assets
Cash ................................................................................
$ 48,000
Accounts receivable .....................................................
76,660
Office supplies ...............................................................
7,000
Prepaid insurance .........................................................
8,600
Office equipment ........................................................... $150,000
Accumulated depreciationOffice equipment .......... (40,000) 110,000
Total assets ....................................................................
$250,260
Liabilities
Accounts payable ..........................................................
Interest payable .............................................................
Salaries payable ............................................................
Unearned consulting fees ............................................
Long-term notes payable ..............................................
Total liabilities ...............................................................
$ 42,000
1,600
11,200
17,800
80,000
152,600
Equity
D. Chen, Capital .............................................................
Total liabilities and equity ............................................
97,660
$250,260
3-47

Part 1
LIGHTNING COURIER
Income Statement
Revenues
Delivery fees earned ..................................... $580,000
Interest earned ............................................... 24,000
Total revenues ...............................................
Expenses
Depreciation expenseTrucks .................... 24,000
Depreciation expenseEquipment ............. 46,000
Salaries expense ........................................... 64,000
Wages expense ............................................. 290,000
Interest expense ............................................ 25,000
Office supplies expense ............................... 33,000
Advertising expense ..................................... 26,400
Repairs expenseTrucks ............................ 34,600
Total expenses ..............................................
Net income .......................................................
$604,000
543,000
$ 61,000
LIGHTNING COURIER
Statement of Owner's Equity
J. Hallam, Capital, December 31, 2010 ..........
Plus : Net income ...........................................
Less: Withdrawals by owner .........................
J. Hallam, Capital, December 31, 2011 ..........
3-48
$115,000
61,000
176,000
40,000
$136,000

Part 1 (concluded)
LIGHTNING COURIER
Balance Sheet
December 31, 2011
Assets
Cash ......................................................................
$ 48,000
Accounts receivable ............................................
110,000
Interest receivable ................................................
6,000
Notes receivable (due in 90 days).........................
200,000
Office supplies .....................................................
12,000
Trucks ................................................................... $124,000
Accumulated depreciationTrucks ...................
(48,000)
76,000
Equipment .............................................................
260,000
Accumulated depreciationEquipment ............ (190,000)
70,000
Land .......................................................................
90,000
Total assets ..........................................................
$612,000
Liabilities
Accounts payable ................................................
Interest payable ....................................................
Salaries payable ...................................................
Unearned delivery fees ........................................
Long-term notes payable ....................................
Total liabilities ......................................................
$124,000
22,000
30,000
110,000
190,000
476,000
Equity
J. Hallam, Capital .................................................
Total liabilities and equity ...................................
136,000
$612,000
3-49
Part 2
Profit margin = $61,000 / $604,000 = 10.1%
Problem 3-6BA (40 minutes)
Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts:
Apr. 1
Prepaid Consulting Fees ..................................... 3,450

Cash ...............................................................
3,450
Paid for future consulting services.
Prepaid Insurance ................................................ 2,700

Cash ...............................................................
2,700
30 Cash ....................................................................... 7,500

Unearned Service Fees ................................
7,500
May 1
Prepaid Advertising ............................................. 3,450

Cash ...............................................................
3,450
23
Cash ..................................................................... 9,450

Unearned Service Fees ...............................
9,450
31 Consulting Fees Expense .................................... 1,500

Prepaid Consulting Fees ..............................
1,500
To adjust prepaid consulting fees.
31 Insurance Expense ...............................................

Prepaid Insurance .........................................
450
450
To adjust prepaid insurance.
31 Unearned Service Fees ....................................... 3,900

Service Fees Earned .....................................
3,900
31 Advertising Expense ............................................ 2,400

Prepaid Advertising ......................................
To adjust prepaid advertising.
31 Unearned Service Fees ........................................ 4,500

3-50
2,400
................................................Service Fees Earned

................................................4,500
Problem 3-6BA (Continued)

Part 2
Method that records prepaid expenses and unearned revenues in income statement accounts:
Apr. 1
Consulting Fees Expense .................................

Cash .............................................................
3,450
3,450
Paid for future consulting services.
Insurance Expense .............................................

Cash .............................................................
2,700
2,700
30
Cash .....................................................................
Service Fees Earned ...................................
7,500
7,500
May 1
Advertising Expense ..........................................

Cash .............................................................
3,450
3,450
23
Cash .....................................................................
Service Fees Earned ...................................
9,450
9,450
31
Prepaid Consulting Fees ...................................

Consulting Fees Expense ..........................
1,950
1,950
To adjust for prepaid consulting fees.
31
Prepaid Insurance .............................................

Insurance Expense .....................................
2,250
2,250
To adjust for prepaid insurance.
31
Service Fees Earned ..........................................

Unearned Service Fees .............................
3,600
3,600
31
Prepaid Advertising ...........................................

Advertising Expense ..................................
1,050
1,050
To adjust for prepaid advertising.
31
Service Fees Earned ..........................................

Unearned Service Fees .............................
3-51
4,950
4,950
Problem 3-6BA (Concluded)

Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Prepaid consulting fees as of May 31 .........................................
Consulting fees expense for two months ..................................
Insurance expense for two months ............................................
Prepaid insurance as of May 31 ..................................................
Unearned service fees as of May 31 ($3,600 + $4,950) .............
Service fees earned for two months ($3,900 + $4,500) .............
Prepaid advertising as of May 31 ................................................
Advertising expense for two months..........................................
$ 1,950
1,500
450
2,250
8,550
8,400
1,050
2,400
When prepaid expenses and unearned revenues are recorded in balance

sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.
3-52
SERIAL PROBLEM SP 3
Serial Problem, Business Solutions (180 minutes) Part 1
<Note: The general ledger is displayed at the end of Part 6>
Journal entries
Dec. 2
Advertising Expense .................................. 655

Cash .....................................................101
1,025
1,025
Paid share of mall advertising costs.
Repairs ExpenseComputer ..................... 684

Cash .....................................................101
500
500
Repaired the computer.
Cash ............................................................. 101

Accounts Receivable ..........................106
3,950
3,950
Collected accounts receivable.
10
Wages Expense .......................................... 623

Cash .....................................................101
750
750
Paid employee for part-time work.
14
Cash ............................................................. 101

Unearned Computer Services Revenue ...236
1,500
1,500
Received advance on work to be performed.
15
Computer Supplies .................................... 126

Accounts Payable ...............................201
1,100
1,100
Purchased supplies on credit.
16
No entry recorded in the journal.
20
Cash ............................................................. 101

Computer Services Revenue .............403
5,625
5,625
Collected cash revenue from customer.
28
Cash ............................................................. 101

Accounts Receivable ..........................106
3,000
3,000
Collected accounts receivable.
29
Mileage Expense ........................................ 676

Cash .....................................................101
192
192
Reimbursed Rey for mileage.
31
S. Rey, Withdrawals ................................... 302

Cash .....................................................101
Paid cash for owner withdrawal.
3-53
1,500
1,500
Serial Problem, SP 3 (Continued)

Part 2
Adjusting entries
Dec. 31 Computer Supplies Expense .........................652
Computer Supplies .................................126
3,065
3,065
Adjustment for supplies used (supplies

balance less cost of supplies available).
31 Insurance Expense .........................................637

Prepaid Insurance ...................................128
555
555
Adjustment for expired insurance (1/4

of $2,220 original prepaid amount).
31 Wages Expense ..............................................623

Wages Payable ........................................210
500
500
Adjustment for accrued wages.
31 Depreciation ExpenseComputer Equip .......613

Computer Equipment ...........................168
1,250
1,250
Adjustment for computer equipment depreciation:

Cost ......................................................... $20,000
Predicted life ...........................................
4 years
Annual depreciation (cost/life) ...............
$5,000
Expense for three months ......................
$1,250
31 Depreciation ExpenseOffice Equip ............612

Office Equipment ..................................164
400
400
Adjustment for office equipment depreciation:

Cost .........................................................
Predicted life ...........................................
Annual depreciation (cost/life) ...............
Expense for three months ......................
$8,000
5 years
$1,600
$400
31 Rent Expense ..................................................640

Prepaid Rent ............................................131
Adjustment for expired rent (3/4 of
$3,300 original prepaid amount).
3-54
2,475
2,475

Part 3
BUSINESS SOLUTIONS
December 31, 2011
Debit
Cash ........................................................................... $ 48,372
Accounts receivable .................................................
5,668
Computer supplies ...................................................
580
Prepaid insurance .....................................................
1,665
Prepaid rent ...............................................................
825
Office equipment ......................................................
8,000
Accumulated depreciationOffice equipment .......
Computer equipment ................................................
20,000
Accumulated depreciationComputer equipment
Accounts payable .....................................................
Wages payable ..........................................................
Unearned computer services revenue ...................
S. Rey, Capital ............................................................
S. Rey, Withdrawals ...................................................
7,100
Computer services revenue .....................................
Depreciation expenseOffice equipment ..............
400
Depreciation expenseComputer equipment ........
1,250
Wages expense .........................................................
3,875
Insurance expense ...................................................
555
Rent expense ............................................................
2,475
Computer supplies expense ....................................
3,065
Advertising expense ..................................................
2,753
Mileage expense .......................................................
896
Miscellaneous expenses ..........................................
250
Repairs expenseComputer ...................................
1,305
Totals .......................................................................... $109,034
3-55
Credit
400
1,250
1,100
500
1,500
73,000
31,284
_______
$109,034

Part 4
BUSINESS SOLUTIONS
Income Statement
For Three Months Ended December 31, 2011
Revenue
Computer services revenue.......................................
Expenses
Depreciation expenseOffice equipment ...............
Depreciation expenseComputer equipment .........
Wages expense ...........................................................
Insurance expense .....................................................
Rent expense ..............................................................
Computer supplies expense ......................................
Advertising expense ...................................................
Mileage expense .........................................................
Miscellaneous expenses ............................................
Repairs expenseComputer.....................................
Total expenses ............................................................
Net income ....................................................................
$31,284
$ 400
1,250
3,875
555
2,475
3,065
2,753
896
250
1,305
16,824
$14,460
Part 5
BUSINESS SOLUTIONS
For Three Months Ended December 31, 2011
S. Rey, Capital, October 1, 2011 ..................................
Plus: Net income ..........................................................
Less: Withdrawals ........................................................
S. Rey, Capital, December 31, 2011 ............................
3-56
$73,000
14,460
87,460
7,100
$80,360

Part 6
BUSINESS SOLUTIONS
Balance Sheet
December 31, 2011
Assets
Cash ................................................................................
Accounts receivable .....................................................
Computer supplies ........................................................
Prepaid insurance .........................................................
Prepaid rent ...................................................................
Office equipment ........................................................... $ 8,000
Accumulated depreciationOffice equipment .............
(400)
Computer equipment .....................................................
Accumulated depreciationComputer equipment ......
Total assets .....................................................................
Liabilities
Accounts payable ...........................................................
Wages payable ...............................................................
Unearned computer services revenue .........................
Total liabilities ................................................................
Equity
S. Rey, Capital ................................................................
Total liabilities and equity .............................................
3-57
20,000
(1,250)
$ 48,372
5,668
580
1,665
825
7,600
18,750
$ 83,460
1,100
500
1,500
3,100
80,360
$ 83,460

[Note: Ledger includes all entries from prior three months. The Working Papers shorten
the solution by showing account balances as of November 30.]
General Ledger
Cash
Date
Oct.
Nov.
Dec.
Explanation
PR
1
2
5
8
15
17
20
22
31
31
1
2
5
18
22
28
30
30
2
3
4
10
14
20
28
29
31
Debit
45,000
4,800
1,400
4,633
2,208
3,950
1,500
5,625
3,000
3-58
Acct. No. 101

Credit
Balance
45,000
3,300
41,700
2,220
39,480
1,420
38,060
42,860
805
42,055
1,728
40,327
41,727
875
40,852
3,600
37,252
320
36,932
41,565
1,125
40,440
42,648
250
42,398
384
42,014
1,750
40,264
2,000
38,264
1,025
37,239
500
36,739
40,689
750
39,939
41,439
47,064
50,064
192
49,872
1,500
48,372

Date
Oct.
Nov.
Dec.
Date
Oct.
Nov.
Dec.
Date
Oct.
Dec.
Date
Oct.
Dec.
Date
Oct.
Date
Dec.
6
12
15
22
28
8
18
24
4
28
Accounts Receivable
Explanation
PR
Debit
4,800
1,400
5,208
5,668
3,950
Computer Supplies
Explanation
PR
3
5
15
31
Prepaid Insurance
Explanation
PR
5
31
Prepaid Rent
Explanation
PR
2
31
Office Equipment
Explanation
PR
1
Acct. No. 106

Credit
Balance
4,800
6,200
4,800
1,400
1,400
0
5,208
10,876
2,208
8,668
12,618
3,950
8,668
3,000
5,668
Debit
1,420
1,125
1,100
Acct. No. 126

Credit
Balance
1,420
2,545
3,645
3,065
580
Debit
2,220
Acct. No. 128

Credit
Balance
2,220
555
1,665
Debit
3,300
Acct. No. 131

Credit
Balance
3,300
2,475
825
Debit
8,000
Acct. No. 163

Credit
Balance
8,000
Accumulated DepreciationOffice Equipment

Acct. No. 164
Explanation
PR
Debit
Credit
Balance
31
400
400
3-59

Date
Oct.
Date
Dec.
Date
Oct.
Dec.
Date
Dec.
Date
Dec.
Date
Oct.
Date
Oct.
Nov.
Dec.
Computer Equipment
Explanation
PR
Debit
20,000
Acct. No. 167

Credit
Balance
20,000
Accumulated DepreciationComputer Equipment

Acct. No. 168
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250
Accounts Payable
Explanation
PR
Debit
3
8
15
1,420
Explanation
Wages Payable
PR
Debit
31
Acct. No. 210

Credit
Balance
500
500
Unearned Computer Services Revenue

Explanation
PR
Debit
Acct. No. 236

Credit
Balance
1,500
1,500
S. Rey, Capital
Explanation
PR
Acct. No. 301

Credit
Balance
73,000
73,000
14
Debit
31
30
31
Acct. No. 201

Credit
Balance
1,420
1,420
0
1,100
1,100
S. Rey, Withdrawals
Explanation
PR
Debit
3,600
2,000
1,500
3-60
Acct. No. 302

Credit
Balance
3,600
5,600
7,100
6
12
28
2
8
24
20
Acct. No. 403

Credit
Balance
4,800
4,800
1,400
6,200
5,208
11,408
4,633
16,041
5,668
21,709
3,950
25,659
5,625
31,284
Date
Dec.
31
Depreciation ExpenseOffice Equipment

Acct. No. 612
Explanation
PR
Debit
Credit
Balance
400
400
Date
Dec.
Depreciation ExpenseComputer Equipment

Acct. No. 613
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250
Date
Oct.
Nov.
Dec.
Date
Oct.
Nov.
Dec.
Date
Dec.
Computer Services Revenue

Explanation
PR
Debit
Wages Expense
Explanation
PR
31
30
10
31
Debit
875
1,750
750
500
Acct. No. 623

Credit
Balance
875
2,625
3,375
3,875
31
Insurance Expense
Explanation
PR
Debit
555
Acct. No. 637

Credit
Balance
555
3-61
Serial Problem, SP 3 (Concluded)

Date
Dec.
Date
Dec.
Date
Oct.
Dec.
Date
Nov.
Dec.
Date
Nov.
Date
Oct.
Dec.
31
Debit
2,475
Acct. No. 640

Credit
Balance
2,475
31
Computer Supplies Expense

Explanation
PR
Debit
3,065
Acct. No. 652

Credit
Balance
3,065
20
2
Advertising Expense
Explanation
PR
Debit
1,728
1,025
Acct. No. 655

Credit
Balance
1,728
2,753
Mileage Expense
Explanation
PR
1
28
29
Debit
320
384
192
Acct. No. 676

Credit
Balance
320
704
896
22
Miscellaneous Expense
Explanation
PR
Debit
250
Acct. No. 677

Credit
Balance
250
17
3
Repairs ExpenseComputer
Explanation
PR
Debit
805
500
Acct. No. 684

Credit
Balance
805
1,305
Explanation
Rent Expense
PR
3-62
Reporting in Action
BTN 3-1
1. The revenue recognition principle requires that revenue be recorded

when realized or realizable and earned, not before and not after. Most
companies earn revenue when they provide services and products to
customers.
2. Research In Motion provides information on revenue recognition in its
footnote 1 titled Research In Motion Limited and Summary of
Significant Accounting Policies. They report that Revenue from the
sales of Blackberry devices is recognized when title is transferred to the
customer and all significant contractual obligations that affect the
customers final acceptance have been fulfilled. For hardware products
for which software is deemed not to be incidental, the Company
recognizes revenue in accordance with industry specific software
revenue recognition guidance. Research In Motion also explains how it
estimates accruals for price protection commitments, incentive
programs, warranties and royalties related to sales of Blackberry
devices.
3. For fiscal year-end February 28, 2009, the profit margin is ($ millions):
$1,893 / $11,065 = 0.171 = 17.1%
For fiscal year-end February 27, 2010, the profit margin is ($ millions):
$2,457 / $14,953 = 0.164 = 16.4%
4. Solution depends on the financial statements accessed.
3-63
Comparative Analysis
BTN 3-2
1. Research In Motion
Current year, profit margin = $2,457 / $14,953 = 16.4%
Prior year, profit margin
= $1,893 / $11,065 = 17.1%
Apple
Current year, profit margin = $8,235 / $42,905
Prior year, profit margin
= $6,119 / $37,491
= 19.2%
= 16.3%
2. Apple is more successful on the basis of profit margin in the current

year relative to Research In Motion, but Research In Motion is more
successful based on the prior year profit margin. Research In Motions
profit margin declined in the current year while Apples increased. In
the current year, Research In Motion earned an average of 16.4 cents on
each dollar while Apple earned 19.2 cents on each dollar.
Ethics Challenge
BTN 3-3
1. GAAP requires that annual deprecation be accumulated in a contraasset account, called Accumulated Depreciation. While property, plant,
and equipment is often shown at its net value on the balance sheet (as
with Research In Motions balance sheet in Appendix A) the cost of
property, plant, and equipment along with its related accumulated
depreciation are reported in the footnotes. Thus, Bergez is correct with
her journal entry recommendation.
2. One strength of Welchs method would be the ease of preparing the
balance sheet. The property, plant, and equipment balance in the
adjusted trial balance would be directly transferable to the balance sheet
when the preparer desired to show the amount at net. Welchs approach
carries weaknesses in that financial statement users would not be able
to ascertain the original cost of the equipment or be able to know how
much of the original cost had been allocated to depreciation to date.
3. While both approaches would lead to the same total assets on the
balance sheet, GAAP requires Bergezs approach. As a professional,
Bergez is required to uphold the standards of her profession and, thus,
the decision is an ethical one for her.
3-64
Communicating in Practice
BTN 3-4
This communication activity has no set solution. A class discussion of the

ratios can be conducted with emphasis on (1) return and profitability by
industries and (2) a contrast of debt financing between industries.
Taking It to the Net
BTN 3-5
1. The Gaps main brands (stores) are The Gap, Old Navy, and Banana
Republic. It also has Piperlime and Athleta brands.
2. The Gaps fiscal year-end is January 30, 2010. It appears that The Gaps
fiscal year-end is consistently set as of the Saturday closest to January
31 meaning it falls in the last week of January or first week of
February.
3. Net sales for the year ended January 30, 2010, are $14,197 million.
4. Net income for the year ended January 30, 2010, is $1,102 million.
5. Profit margin = $1,102 million / $14,197 million = 7.76%
6. The company probably chose a fiscal year-end as the end of January or
early February to have it be consistent with their natural year. For many
retailers, the highest amount of sales is in November and December
(with some residual in January including sales returns).
3-65
Teamwork in Action
BTN 3-6
Note that there is no specific solution to this activity. Still, the presentation
of each expert team should reflect the following summary points:
Type
Before Adjusting
Balance Sheet
Account
Account
Prepaid expense
Asset overstated
Income Statement
Adjusting Entry
Expense understated Dr. Expense

Cr. Asset*
Unearned revenues Liability overstated Revenue understated Dr. Liability

Cr. Revenue
Accrued Expenses
Liability understated Expense understated Dr. Expense

Cr. Liability
Accrued Revenues
Asset understated
Revenue understated Dr. Asset

Cr. Revenue
* For depreciation, one would Credit the Accumulated Depreciation contra account.
Some implementation notes: This activity allows all students to be actively

involved in the learning process. Encourage students to take the opportunity
to ask questions in the small group environment the learning team provides.
Encourage the better students to serve as experts on unearned revenues. The
instructors observation of and reactions to expert teams development of
presentation material as well as the delivery to learning teams will have a
significant impact on the effectiveness of this activity.
3-66
Entrepreneurial Decision
BTN 3-7
1. a. To record the collection of cash from sale of the gift certificate in

advance of delivery of merchandise to the customer:
Cash .....................................................................
Unearned revenue.......................................
300
300
b. To record the delivery of merchandise to the customer when he/she

uses the gift certificate:
Unearned revenue ..............................................
Revenue earned ..........................................
300
300
2. Carrying less inventory would allows Cheezburger Network to save the

costs of carrying that added inventory; such as warehousing costs,
insurance, theft/damage, and other potential losses. Saving these
costs can increase income. By increasing income (via lower costs),
profit margin should increase.
3. If it carries additional inventory, Cheezburger Network can potentially

sell more merchandise and increase its profits. This might further fuel
increased sales as additional customers might be attracted to its
products. On the other hand, carrying inventory has risks. The most
important risk for a company like Cheezburger Network is that of
inventory obsolescence. Consumer tastes and trends are constantly
changing, and by carrying less inventory, the business can be more
flexible in quickly responding with products consistent with those
changing consumer trends.
3-67
Hitting the Road
BTN 3-8
There is no formal solution to this field activity. The instructor may wish to
tally students findings to see what companies were selected, who
responded, what was the response time, etc. The instructor can also
periodically ask students to bring in examples from their selected
companies at certain times, and then compare and contrast them with the
examples in the book.
Global Decision
BTN 3-9
1. Nokias Note 1 (Accounting Principles - Revenue Recognition) reports

that Sales from the majority of the Group are recognized when the
significant risks and rewards of ownership have transferred to the
buyer, continuing managerial involvement usually associated with
ownership and effective control have ceased, the amount of revenue can
be measured reliably, it is probable that economic benefits associated
with the transaction will flow to the Group and the costs incurred or to
be incurred in respect of the transaction can be measured reliably.
Subsequent text and paragraphs provide more details for revenue
recognition for specific sub-categories of revenues.
2. Profit margin = 260 EUR / 40,984 EUR = 0.6% (EUR in millions)
3-68

Adjusting Accounts and Financial Statements

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

The accrual basis of accounting generally provides a better indication of company

The Accumulated Depreciation contra asset account is used for depreciation. It

Unearned revenue refers to cash received in advance of providing products and

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Quick Study 3-2 (10 minutes)

To record 6-month insurance coverage expired.

b. Supplies Expense .........................................................

To record supplies used during the year.

Quick Study 3-3 (10 minutes)

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

b. No depreciation adjustments are made for land as it is expected to last

Quick Study 3-4 (15 minutes)

To recognize legal revenue earned (20,000 x 3/4).

b. Unearned Subscription Revenue ................................

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

To record salaries incurred but not yet paid.

Quick Study 3-6 (15 minutes)

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Quick Study 3-8 (10 minutes)

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Quick Study 3-9 (15 minutes)

Quick Study 3-10 (15 minutes)

1. Accrue salaries expense

2. Adjust the Unearned Services Revenue account

3. Record the earning of services revenue for which

Quick Study 3-11 (10 minutes)

Under IFRS, financial statements normally present assets from least

Under IFRS, financial statements normally present liabilities from

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-2 (30 minutes)

Unearned Fee Revenue ....................................................

To record earned portion of fee received in advance.

b. Wages Expense .................................................................

To record wages accrued but not yet paid.

Depreciation ExpenseEquipment ................................

To record depreciation expense for the year.

d. Office Supplies Expense ..................................................

To record office supplies used ($480 + $5,349 - $587).

Insurance Expense ...........................................................

To record insurance coverage expired ($5,000 - $2,200).

Interest Receivable .........................................................

To record interest earned but not yet received.

g. Interest Expense .............................................................

To record interest incurred but not yet paid.

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-3 (25 minutes)

Depreciation ExpenseEquipment ................................

b. Insurance Expense ...........................................................

Office Supplies Expense ..................................................

d. Unearned Fee Revenue ....................................................

Insurance Expense ...........................................................

Wages Expense .................................................................

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-4 (25 minutes)

To record accrued legal fees.

May 12 Legal Fees Payable ............................................

To pay accrued legal fees.

Salaries Payable .................................................

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-5 (15 minutes)